Q3 2021 US Ecology Inc Earnings Call
Good morning, and welcome to the third quarter 2021 U S Ecology, Inc earnings Conference call.
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I would now like to turn the conference over to Eric Gerets Chief Financial Officer. Please go ahead.
Good morning, and thank you for joining us today.
Joining me on the call. This morning are chairman, President and Chief Executive Officer, Jeff Feeler, Executive Vice President and Chief Operating Officer, Simon Bell and executive Vice President of sales and marketing Steve Wally.
Before we begin please note that certain statements contained in this conference call that do not describe the historical facts are forward looking statements as defined in the private Securities Litigation Reform Act of 95.
Since forward looking statements include risks and uncertainties actual results may differ materially from those expressed or implied by such statements.
<unk> that could cause results to differ materially from those expressed include but are not limited to those discussed in the company's filings with the Securities and Exchange Commission.
These risks and uncertainties also include but are not limited to statements regarding <unk>.
The impact of the ongoing COVID-19 pandemic, the macroeconomic economic impact of specific end markets in which we operate and our expectations for the financial results for 2021.
Management cannot control or predict many factors that determine future results listeners should not place undue reliance on forward looking statements, which reflect management's views only on the date such statements are made we undertake no obligation to revise or update any forward looking statements or to make any other forward looking statements, whether as a result of new information future events or.
Or otherwise.
For those joining by webcast you can follow along with today's presentation for those listening by phone you can access today's presentation on our website at www Dot U S ecology dot com.
Throughout this morning's earnings release, and our call and presentation today, we refer to adjusted EBITDA adjusted earnings per diluted share cash earnings per diluted share and adjusted free cash flow.
These metrics are not determined in accordance with general generally accepted accounting principles and therefore are susceptible to varying calculations are done.
Finishing calculation and reconciliation to the financial statements of adjusted earnings per diluted share cash earnings per diluted share adjusted EBITDA and adjusted free cash flow can be found in exhibit a of our earnings release.
We believe these non-GAAP metrics are useful in evaluating our reported results.
With that I'd like to turn the call over to Jeff.
Thank you Eric and good morning, everyone. Joining the call today I would like to begin by thanking all of our colleagues who are working hard keeping people and the environment safe, including our emergency response teams that are actively involved in cleaning up the aftermath of hurricane Ida and finishing up the oil spill in southern California responding.
These and other emergencies as part of our core mission to provide critical environmental solutions to protect human health and the environment turning to our third quarter results for those that are following the webcast presentation I'll direct your attention to slide five as.
As expected, we saw sequential improvement in revenue and profitability across our three operating segments in the third quarter. Despite ongoing delays in our event business along with continued supply chain cost inflation and pandemic related challenges our waste solutions segments revenue increased 7% in the third quarter over last year.
Base business for our waste solutions segment increased 11% compared to the third quarter last year and was up 2% sequentially from the second quarter of this year.
The increase was driven by continued improvement in fundamentals and a 13% increase in our landfill volumes, we saw broad base.
Base business improvements across most of our end markets during the quarter year to date base business is up 5%.
While we are on track with.
Our targeted base business growth of 5% to 7% for the full year due to ongoing challenges in our with our industrial customers.
And what they're facing.
We expect the base business to come in at the low end of that range, plus or minus a percent or two for the full year.
Our event business for the waste solutions segment declined 18% compared to the third quarter last year due to additional deferrals into 2022.
Favorable service mix as replacement projects were at a lower average selling price compared to the third quarter last year.
This combined with cost pressures contributed to a decline in profitability and margin in the third quarter.
Compared to last year, turning to our field services. This segment thawed and delivered solid growth.
<unk>, 5%, despite a difficult comp with strong COVID-19 deconvert contamination work and large emergency response projects in the third quarter last year that were not were not replaced.
Revenue growth was driven by our remediation and small quantity generation service lines led by a 14% increase in our retail services as we continue to execute and gain market share.
With a recent award commencing in the first quarter of 2022.
And the potential for additional growth from our existing retail customers, we expect to gain additional market share next year.
Our field services growth was partially offset by lower transportation logistics that has been hampered by supply and labor constraints and lower large scale emergency response revenue.
However, late in the third quarter and into the early into the fourth quarter. We responded to multiple large scale E. R.
Emergency response incidents for the first time this year, which is gonna be expect it to be a positive for our fourth quarter.
Like others in the industry, we are facing labor constraints, resulting from higher resulting in higher subcontractor work as well as higher inflation related costs, including transportation materials and supplies.
Resulted in lower EBITDA and margin compared to the third quarter last year to help mitigate the impact we are focused on managing the costs, we can control and adjusting spot pricing and surcharges, while we prepare for more significant price increases in 2022.
We believe that we will be able to pass through these costs.
Through pricing over time.
Our energy waste segment had another strong a strong quarter of growth and delivered results ahead of our expectations with a fifth consecutive quarter of improved EBITDA and EBITDA margin.
These improving results.
We're driven by increased activity in the Permian and Eagle Ford basins and resulted in revenue doubling from the third quarter last year and resulted in EBITDA of $3 $5 million.
Total EBITDA for the quarter was $45 $4 million in line with the third quarter of last year. We incur we are encouraged with the growth generated from our recurring revenue in our base business field services in energy waste segments was able to offset some of the challenges we're facing including the lower <unk>.
A large scale E. Our emergency response and event business, a less favorable service mix and continued labor and inflation challenges.
We remain confident that our business fundamentals are strong and we are seeing improvements driven by an industrial recovery. Despite ongoing supply chain disruption and labor challenges that may that many companies are navigating we believe growth opportunities will accelerate across our service lines as port congestion congestion subsea.
<unk> and more people return to the workforce on the labor front, we are seeing labor conditions improved with increased applications and the highest recruiting rates of the year.
As we entered the final quarter of the year, we expect sequential improvement supported by continued growth in our recurring business.
<unk> of several sizable.
Event business project execution on several large scale emergency response events and continued recovery in our energy waste business as such we expect the fourth quarter will be the strongest quarter of the year. We expect project deferments experienced this year will benefit 2022 and combined.
With expectations for continued recovery of the industrial sector next year, we believe we will be well positioned for growth in 2022 before I turn the call over to Eric I want to review some key priorities initiatives that our teams are working and executing towards that we believe will drive some longer term value.
First we are we are in the midst of advancing several permit modifications across our network that will open up more service and waste opportunities to that end. We are focused on expanding our radiological capabilities mercury waste treatment options and growing our thermal capabilities to increase our addressable market internal.
Lies more waste and thereby limit limiting our dependence on the backlog incineration market.
Next.
We are leveraging recent technology invest advancements, including digitalization and software to help increase business and drive efficiencies in our operations. For example, our digital marketing efforts have generated a 300% increase in our lead generation this year.
Our investments in AI software has generated a 30% increase in stops per day, and our retail program with the installation of this technology in our fleet. We believe further efficiencies will be realized as retail customers adopt these technologies, including a new sorting process in the back of their retail stores.
We also recently launched a new lab pack our lab pack platform program known as LPX that will improve in field efficiencies reduce training cycles for technicians and delivered improved accuracy and real time data to our customers.
Further we also continued our continuing to deploy organic investments to support both our service offerings and sustainability initiatives.
Some of our larger investments. This year include the construction of a new container management building in the east Eastern part of the U S to support our growing retail and LCL business. We are in the final stages of deploying a second aerosol recycling unit in the Midwest West, which we expect will be fully deployed and operational in the first quarter of next year.
This aerosol unit will open up additional opportunities to internalize high volume waste streams generated from our services group.
On the sustainability front, we have successfully piloted a new container reconditioning system that allows us to recycle and reuse containers within our operations. We expect to have a production run rate of 100000 containers by the end of the year and we anticipate this will continue to grow in future years eventually.
Opening up opportunities to provide refurbished containers to our customers.
As part of our overall ESG strategy in 2021.
We set out to quantify the amount of greenhouse gas emission throughout our operations and established reduction goals as we have discussed before our fleet operations represents our largest source of direct greenhouse gases.
As our landfills, our inorganic and do not generate methane gas.
We have established a goal to reduce our direct emissions by 30% by 2030 through upgrades to our fleet use of renewable fuels and other improved route efficiencies.
We are also exploring the feasibility of integrating electric vehicle as well as alternate other alternative fuel to our power units into our fleet.
We have established a goal of the.
Our goal to demonstrate by 2025 that are recycling businesses, such as our aerosol can recycling glycol and oil recycling and metals recovery.
Minimize the environmental impacts from new production of many carbon intensive materials and thereby eliminate the generation of greenhouse gas by three times the direct emissions produced by our operations.
Finally, we are well positioned to take advantage of the emerging P fast market with a wide variety of capabilities across our network, including thermal class one deep well record permitted subtitle C landfills and wastewater treatment options all included as options in the EPS guidance.
In fact during the third quarter and continuing into the fourth quarter of this year. We've seen several large P past jobs, where customers are choosing our secured solutions to advance and address their environmental needs. We.
We expect further opportunities in this area as regulations, our formula formalized and additional funding is secured for cleanup activities with that I'll turn the call back to Eric.
Thanks, Jeff.
Starting with consolidated results on slide eight revenue for the third quarter of 2021 was $257 2 million.
Revenue for our waste solutions segment was $115 2 million for the third quarter up 7% compared to $107 2 million in the third quarter of 2020.
This increase was driven by a 5% increase in treatment and disposal revenue and a 25% increase in transportation revenue.
As Jeff mentioned, the increase in treatment and disposal revenue was due to an 11% increase in base business, partially offset by an 18% decrease in event business compared to the third quarter last year.
The field services segment delivered revenue of $131 $6 million in the third quarter of 2021 up 5% compared to $125 $7 million in the third quarter of 2020.
The increase was primarily due to growth in our remediation small quantity generation and industrial services business lines, partially offset by lower revenue in our emergency response and transportation service lines.
Revenue for the energy waste segment increased to $10 $4 million up from $5 2 million in the third quarter last year.
The increases in revenue as well as our cost control initiatives implemented in 2020 resulted in an EBITDA margin of 34% compared to only 2% in the third quarter last year and the fifth consecutive quarter of improved EBITDA and EBITDA margin.
Total gross margin was 25% in the third quarter down from 27% in the third quarter last year gross.
Gross margin for our waste solutions segment was 34% down from 39% in the third quarter of 2020.
Treatment and disposal margin for the waste solutions segment was 40% in the third quarter of 2021 down from 43% in the third quarter last year, reflecting lower than business, a less favorable service mix and cost inflation.
Partially offset by a 9% increase in total waste volumes disposed.
Gross margin for our field services segment was 17% in the third quarter compared to 20% a year ago due to a less favorable service mix labor constraints.
Your sub contracting work and cost inflation in materials and transportation.
Selling general and administrative spending or SG&A was $47 $7 million in the third quarter of 2021 down from $51 $1 million in the third quarter of 2020, which included $1 $6 million in business development and integration expenses.
Excluding business development and integration expenses SG&A decreased 5% in the third quarter of 2021 compared to the third quarter last year. This decrease was primarily related to lower incentive compensation and lower insurance costs.
Adjusted EBITDA was consistent with the third quarter last year at $45 4 million.
We generated adjusted free cash flow of $14 9 million in the third quarter of 2021 down from $16 8 million in the third quarter last year. This decline was a direct result of increased capital spending during the quarter of approximately $9 $7 million compared to the third quarter last year.
We had cash of $71 4 million and $62 million of available capacity on our revolving line of credit at the end of the quarter.
Net borrowings were $685 9 million at the end of the third quarter and our leverage was our leverage was four six times down from over four seven times at the end of the second quarter.
Turning to our business outlook is included in our release. This morning, we are revising our 2021 full year guidance as shown on slide 11.
We now expect 2021, adjusted EBITDA to range from $158 million to $167 million down from our previously issued guidance of $165 million to $175 million.
For adjusted free cash flow, we are fine tuning our guidance to be between $42 million $54 million adjusted earnings per diluted share is now expected to range from 22 to <unk> 41.
Compared to our previous range of 37 to <unk> 60.
Revenue is tracking towards the higher end of our estimates and we are increasing the lower end of our guidance range from $940 million to $960 million with the top end of the range remaining at 90 $190 million.
To dive a bit deeper into our guidance revision. The primary drivers of the downward revision continued deferments of event business into 2022.
Softer event and base business due to ongoing headwinds as industrial production remains below pre pandemic levels hampered by continued transportation and labor shortages as well as inflationary pressures on the cost side.
These headwinds were partially offset by lower incentive compensation in our revised guidance range compared to what was assumed in our previous guidance range.
While these factors are impacting our outlook for 2000 2000 22021, our business fundamentals remained strong based business continues to increase along with most of our recurring field services, our project pipeline and lease solutions is strong and growing however, deferments and delays are pushing this work into 2022. The good news is there.
This is not lost work and these projects are highly likely to commence shipments in the first half of 2022.
With that I'll turn the call back to Jeff. Thanks, Eric We remained encouraged by continuing improvements in the industrial sector as we move back towards pre pandemic levels. While we continue to navigate short term event business deferral supply chain transportation labor and cost inflation challenges are competitive.
<unk> remains as strong as ever and we continue to leverage our network of irreplaceable facilities and service offerings to win business and position us oncology for the future our operational execution was put on display in October.
As we responded to the Huntington Beach, California oil spill, where we quickly assembled and deployed over 1000 responders using our vast independent network contractor network. This rapid response mitigated the environmental damage and just a matter of days from this unfortunate event as I highlighted earlier, we are executing.
On a number of strategic priorities that will further strengthen our market position and capabilities that we believe will generate incremental growth in the future.
Before I conclude and open the call up for questions I want to once again, thank and recognize our talented team across the U S oncology, particularly those team members that have been on the front lines responding to fires hurricanes oil spills and accidents over the road.
We have the best people in the right assets and remain a trusted partner.
We're positioned to meet our customers' needs with that operator, please open up the call.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Tyler Brown of Raymond James. Please go ahead.
Hey, good morning, guys.
Morning.
Hey lots of discussion this quarter on inflation I think you guys made some helpful comments in your prepared remarks, but just.
Just how quickly do you think you can adjust pricing to offset the headwinds I think you mentioned increases in spot rates with the rest kind of coming in 'twenty two.
Just curious how much of the book is spot and then can you just broadly just to help us all understand how does pricing work and some of the different parts of your business I know, there's a lot there, but that's my big question.
Yeah, Steve do you want to take that and I'll fill in sure.
Yes, so tyler on the waste disposal business, we've already sent out notifications to our customers for January 1st increase it'll be high single digit.
Increase on all of our base.
<unk> and disposal business, so thats in motion.
The services a lot of them are bid on a weekly basis, even though we have.
Master service agreements in place with many of our larger generators.
What happens is we'll go out and measure tank for example for tank cleaning and then we will bid that at the time with current cost so.
Not necessarily an increase needed we just need to bid projects as we go forward with our current rates. So that's in progress also on transportation.
We've been.
Moving transportation rates up as we go each week and we're doing a pretty detailed evaluation. If we need further adjustments effective January one but.
We're pretty confident we'll be able to pass along.
A large percentage of them.
Recover a large percentage of our cost increase with pricing.
Not all of it will happen January one it'll be over time next year, but we feel very confident we'll be able to cover most of that.
Okay, Yeah, very interesting so I just wanted to make sure. So on the base business. It could be up mid to high single digit next year pricing on the waste disposal side and we do have on the services side.
Multiyear agreements, which we're looking at to determine what our options are but yes.
On a big chunk of our base business Youre going to see high.
High single digit increase.
Okay. Okay. That's extremely helpful and then.
Yeah, So tyler on that.
It's probably appreciated known but I'll just state it anyway, but.
We're in a unique time that we haven't really seen.
With the kind of inflationary trends not being very predictable in that front and so we're being prudent on how we go about and looking at pricing right now and needs of our plans, but we are also waiting for for what pricing increases that we're going to see and we've seen that we've had none.
Vacations from some we have it from others.
And there.
I think the good thing about our business and I think Steve highlighted there is we have the ability to price our services zero and it doesn't happen overnight that happens over time that we have that ability there.
And we've got to remain competitive in the marketplace.
In there so as soon.
Assuming others are doing similar type things, then then we'll be able to recover that pricing.
It may happen over quarters as opposed to immediate during the quarter.
Got it.
A lot of our agreements allow us to adjust on 30 or 60 day notice. So if we put in our increase let's say January one and something unexpected happens in first quarter. We're seeing continued inflation, we will still have the ability to make further adjustments as needed.
Okay, Okay very very helpful.
Yeah, Okay, great and then.
Eric on Slide 13, the the guidance bridge is Super helpful. I think it's in the appendix, but I was curious about that 4 million positive delta from corporate it looks like that is all incentive comp, which I get but then if I if I scroll a little bit further it looks like there's another call it aggregate 4 million from incentive.
Comp at the segment level I can't tell if those are.
If that's 8 million total or if it's just the allocations or what exactly you got it yes. So if you look at at the change from our guidance last quarter too to the change this quarter kind of at the midpoint. So from a total EBITDA of $1 70 at the end of last quarter down to 162.
Five.
Embedded in that is about a little over $7 million $7 5 million of incentive comp favor ability just as as the results have come down the financial component of our incentive comp programs such as the majority of it obviously come down commensurately with that so it's about 77 five.
In terms of the change from last quarter's guidance to the current guidance.
So big picture looking out to 'twenty, two which sounds like it should be better so assuming that you get a 100% incentive comp accrual. There I mean are we talking $10 million type headwind next year to EBITDA just big picture.
Yeah, I think that's probably a little high I think it's more in that probably $7 million to $8 million range.
Okay. Okay. That's very helpful. So that would be a full accrual okay, yes correct.
Okay, and then on Capex I know it is early but how should we think about it next year I mean, it seems like maybe you deferred a little bit you've got your fleet refreshed kicking in.
My notes have a pretty large cell development year next year could capex be close to 100 million next year or is that just way too much.
You know Tayo this is Simon.
Depends on a lot of the projects that we have going right now we've got several large projects going at the moment, we are seeing some supply and materials shortages, which do delays schedules. So I can envision some of that shifting over to 'twenty two.
Which could push it up upwards towards the $100 million range.
Okay, Okay, and Tyler I'll, just add on that we're early in the budgeting cycle and.
<unk>.
We're working through that process as we speak right now we're going to be prudent on capital on there. We do know that we have the areas, we will not skimp on his landfill development.
And.
That's just a necessity and we do have that going out. The next couple of years and we know that is a fact.
The rest of it has some discretion to it and depending on the outlook and things like that but I think zinc.
Could it be $100 million, yeah, it could be $100 million next year it could be more in line with what we have this year or what we had planned for originally this year about $90 million. So.
Okay. Okay. That's helpful. And then just my last one here.
And this is just a big broad question, but the leverage still remains relatively high probably higher than you and most wood wood care it to be.
As the business improves.
Are there any things that you can do whether it's monetizing pieces of the book or is there anything that you can do to help accelerate some of the deleveraging I get the better EBITDA is going to be a big part of that but is there anything externally or idiosyncratically that you could do to help there.
So, let's first talk high level with the leverage yes. It is higher than what we would like to have but I think it's important to note that we have a great credit.
The structure that it's not a cash flow issue.
It's more of a math issue and so we do believe just through the growth projections that we have we're going to definitely grow out of that leverage level.
At a good pace as far as your question are there pieces of the business that are.
Whether it's non core or things that could be monetized. We are definitely actively looking at that and we have identified pieces of the business that we are evaluating today that could bring that down and at a much faster rate.
Hmm interesting, okay, I will turn it over thank you.
Thanks Tyler.
Again, if you would like to ask a question. Please press Star then one.
And our next question will come from Michael Hoffman of Stifel. Please go ahead.
Hi, Jeff Eric Simon Steve I Hope everybody is well out there.
Eric.
The dollar amount.
Project revenue.
That has to get done from a regulatory standpoint, it didn't get done in the current in the original budget that could get done.
I know, there's a lot of maybe done.
And 'twenty two.
Well I would tell you if you look at the segment bridge for for waste solutions.
In the deck I mean since since last quarter's guidance, there's about another $4 million of EBITDA. That's shifted from this year to next if you go back to last quarter. There was there was about $3 million of deferrals. There. So we're already talking EBITDA of $7 seven.
$5 million that shifted out of 2021 into 2022, I would say a large portion of that is regulatory driven kind of event work and clean up their projects that that will happen that are going to come. It's just a question of timing and they've they've deferred into next year.
And.
The regulators have been giving lots of extensions on various things and then you all have literally been on incineration, they're giving.
Generators, 30, and 45 day extensions on storage so is there a risk that.
Some of the regulatory stuff is given extensions again because there's.
Past constraints on volume being able to move around trucking and all of that.
On most of the stuff that is from a deferral standpoint, we're highly confident that that's going to move next year I mean, theres actually some of it that is starting to ship whether it's late November December Thats, just going to carryover in that part of the deferral. So.
On that we feel very confident I think your bigger question is as we go to go into 2022 are we going to be living in the same environment of.
Continued deferrals delays things to that effect and you know unfortunately in periods of uncertainty yeah that tends to happen more frequently and we've seen it in our past if you go back through the last couple of cycles, we saw it as well.
I will say the pipeline continues to improve the teams are receiving lots of bids right now.
All indications are there is going to be good opportunities next year, but as we will know a lot more when we release our full year outlook in February of next year, but right now things are pointing in the right direction and we think things are going to be more stabilized.
Yes, Mike.
What we're calling deferrals are government related we have one superfund site.
Actually starting next week won't impact Q4, too much by the time, we mobilized and started shipping but they ran into water issues. When they mobilized a few months ago that got delayed there is not in my mind big risk on that one.
One of the <unk> sites that are just kicking off in a couple of weeks it had to do with getting new work plans.
Delayed three or four months.
We have.
Another job that is.
It has to do with freeway construction on a new bridge and they ran into.
Unexpected waste issues that delayed the project, we have a change of scope in the jobs going to grow at that resulted in a delay, but there's not really much in the way of discretionary work that got delayed at least on the big Big movers at most of these.
We're just schedule issues.
Combination of regulatory and scope problems or waste issues that they didn't expect okay fair enough.
Certainly.
There's evidence.
And the quarters results and and decisions to do things that they like.
Field service, so you know that.
I guess, so what I'm trying to tease out here is that Oh, okay. It's disappointing that there are these pressures and delays and theres deferrals, but there's evidence of activity happening across the breadth of the customer base.
Which suggests that you can't delay some of these things forever, even the discretionary stuff and therefore stuff starts percolating, it's just hard to predict it.
That's the problem, it's hard to predict it.
Yes, and absolutely it can't be deferred in perpetuity. So yes, we're seeing the same thing okay.
Back to teasing out where I was trying to get on the on the your ability to overcome inflation cost inflation.
Given the timing of these price increases the levels.
Is this a by the end of our one Q everything being equal that nothing keeps rising and it sort of has hit a levels and therefore your you can account for it you're caught up or is it take longer to catch up.
I think it will take a few quarters.
In there and Thats, we're assuming we're still going to we're not going to see stability in inflation next year I think it's going to continue to increase in.
In the first half of next year and so what we may have to do some additional adjustments but.
That's going to be all factored into our outlook, but we will we will probably have some headwinds next year, but I think the key takeaways, we will be able to price through it.
And that's the that really goes to the scope of our assets and services and how critically needed they are.
Fair enough and so since we had the model.
I'm thinking about it is first half Scott pressure second half, we start to level off and maybe even exit with some tailwind.
Yes, Okay, and then if industrial production, which is currently being forecast to run between three and 4% next year.
Personally I think that's low, but let's say it is three or four plus what you just shared with us on price, but we havent conversation in the base business that.
Back to a high single digit growth rate.
That's the right way to think about it yes, we're still working through our budgeting process next year, but I think those are good solid data point that you are pointing to next year.
On there.
Our base business as you are probably tracking in your models is not not still back to pre pandemic level I.
During the quarter.
We were still we were if you compare to 2019, we were down about 7%.
From 2019, Q3 and so.
There is ongoing challenges out there I will say if we can alleviate the bottlenecks I know our customers are saying that if they can get labor and raw materials. They have a lot more demand at a lot more product that they would produce.
That would generate more waste overall, so to me that's the big.
Critical area for our customers perspective on understanding what volumes are next year.
Okay fair enough and to that end another player in this market on a call suggested that they could have hired 2000 more people and services based work. They could've done 2000 billable hours more work right.
Assuming you've got the same proportional issue is if you could find the body's either done more work absolutely right. So we have we have 300 open positions smaller scale than maybe the peer you're referencing but yeah that is a headwind in right now if we had those bodies, we would be having billable hours.
In addition, there will be increased waste flows there will be increase equipment charges. It goes on and on and on.
So this is a.
You can't solve this question overnight, but what are the solutions too we are structurally have a smaller labor pool, which to draw off of it.
Structural that's the world we're living in.
What do you do differently.
It's a great question, Mike Michael this assignment.
We're tapping into.
More networks recruiting networks.
You know kind of being more expanding kind of our employee pool. If you will looking at military partnerships tapping into trade schools Lehman connecting with high schools.
When we can we're also looking into internal programs to accelerate the time from <unk> to offer continue.
Continued focusing on our culture.
Things like developing driver committees to understand what's important to them really focusing on the engagement side of making sure USC remains a huge called you remains a fun place to work.
We're looking to tap into our own team is staying on the driver front incentivising our employees to pay for their training to become CDL drivers.
And we are certainly being aggressive in making sure that we're paying consistent with market rates. So we're really it's a case of pulling every lever we can making sure that.
We can continue recruiting best in class, but there's no doubt there's just there's been a sea change and things are little out of bounds out of balance right now, but I will say over the last three months, we have been making meaningful headway on the driver pool in other areas. So these efforts I am describing.
We're starting to see month after month after month.
We're outpacing our gains are outpacing our losses, if you will.
Okay and since I know you care about this I was that weighed Lake and three dollar bridge last weekend and streamers were hidden Brown, who is really great.
<unk>.
We should have been there yeah on the Capex side, Jeff the $10 million.
You made the statement I wanted to just reaffirm you were planning to spend more capex on landfill. This year you did it youre going to do it again next year. This is all the Michigan build out and then we get this real nice drop off in Capex post twenty-three.
What was the 10 million that you didn't spend what didn't you spend it on.
Hey, Michael This is Simon again, it's probably two big buckets. One is the we are building out our capacity at our karnes landfill.
We plan on completing all of that in 'twenty. One some of that is going to land in 'twenty two as we build that out and most significantly we're doing some major investments with some replacement of some tanks, which includes a lot of steel and we have seen delays in getting the steel delivered which has caused us.
To push that project and part into 'twenty two so those two <unk>.
Project site right, there probably represent set.
70% or 80% of the of the deferral if you will.
Okay.
And then Eric there's a $10 million reduction in cash flow from ops in the cash flow bridge, but there's only there's a smaller reduction in net income so what's happening in cash flow from ops that increases that to $10 million.
Yes, the biggest driver really is working capital so as as the fourth quarter becomes our strongest quarter of the year.
We will see some working capital drain on that as we exit the fourth quarter that hopefully will be some pickup next year in terms of working capital. So it's really a working capital story.
In terms of getting paid especially as Jeff mentioned, we're we're responding and have some some large scale E. Our responses in October early November and those payment cycles tend to be a little longer as we're ultimately getting paid through insurance.
Alright, well I think the quality of the assets stood out it's it's in challenging operating environment, but certainly the quality assets stood out.
Thanks, Michael.
This concludes our question and answer session I would like to turn the conference back over to Jeff Feeler for any closing remarks, alright, I want to thank those.
Attended the call today.
Be participating in some conferences over the course of November and looking forward to connecting with you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.